Lock the Risk down 07-14-2011

Cusick's Corner
GOOG! Beats by .91 and the stock is up $60 dollars After Hours. Amazing! This is also a great example of why I was hammering home make sure that you tighten up the risk. Take the opportunity to shore up risk, credit spread strategists should check if they can cover a position for .10 or .20 cents. Look at GOOG, it ran $60 bucks so that 5% out of the money option is now in the money. Lock the Risk down.

Stock market averages gave up early gains and finished lower Thursday. The stage was set for morning gains on Wall Street after data showed Retail Sales up .1 percent in June. Economists were expecting to see a decline of .2 percent. Meanwhile, the Labor Department said the Producer Price Index [PPI] declined by .4 percent last month. Economists were expecting the gauge of wholesale inflation to ease by .2. Separately, the Labor Department reported that weekly jobless claims declined by 22,000 to 405,000 in the period ended July 9. Economists were looking for a drop to 410,000. Stock market averages reacted favorably to the data, but then trading turned more cautious after Federal Reserve Chairman Ben Bernanke delivered a second day of testimony to Congress. While he echoed his pledge to offer additional easing if needed, the Fed Head also said policymakers are "not prepared at this point to take action." A Moody's warning that it might cut the US triple-A credit rating late-Wednesday and the ongoing deadlock in the debate over the debt ceiling also weighed on investor sentiment through midday. Then, an additional wave of selling pressure surfaced late and the Dow Jones Industrial Average finished down 55 points and 145 points off session highs. The tech-heavy NASDAQ lost 34.3.

Bullish
An interesting trade surfaced in Virgin Media (VMED) Thursday. Shares of the Cable TV company finished the day down 4 cents to $27.68 and, in morning trading, one investor bought 10,000 January 29 calls on VMED at an average of $2.125 per contract and sold 20,000 January 33 calls at 77.5 cents apiece. Therefore, they paid 57.5 cents for this bullish 1X2 call ratio spread and are possibly looking for shares to move towards $33 (higher strike price) through the January expiration, which is a gain of 19.2 percent over the next six months. The breakeven is at $29.575 and 6.8 percent above current levels. The debit is at risk if shares fail to move beyond $29. There's also additional risk to the upside, as only half the 33 calls are covered by the 29s.

Bullish trading was also seen in North American Palladium (PAL), Murphy Oil (MUR) and Glu Mobile (GLU).

Bearish
Xerox (XRX) shares lost 15 cents to $10.07 and options volume in XRX rose to 3X the average daily. 11,000 calls and 12,000 puts traded in the name today. Most of the volume was due to one trade, in which the strategist sold 10,000 August 10 puts at 28 cents and sold 10,000 August 10 calls at 53 cents. In other words, they sold the August 10 straddle for a net credit of 81 cents, 10000X. The position looks opening because volume exceeds open interest in both contracts. It's not necessarily a bearish trade, but a bet that shares will hold around $10 through the August expiration in 36 days.

Bearish flow also surfaced in Emulex (ELX), RF Micro Devices (RFMD), and STEC.

Index Trading
Trading was active in the index market due to the expiration. Since the settlement values for the S&P 500 Index (.SPX) and many other cash indexes is computed tomorrow morning, the last day to trade the July puts and calls on the indexes is today. 982,000 calls and 1.02 million puts traded on the SPX, NASDAQ 100 (.NDX), and other cash indexes Thursday, which is about 1.3X the recent average daily volume, according to Trade Alert data. S&P 500 July 1300 puts were the most actives. The contract is about 9 points out-of-the-money and, at these levels (1,308.87) will expire worthless. However, the settlement value has not yet been computed and will be based on prices Friday morning.

ETF Action
iShares Silver Fund (SLV) saw a second day of very heavy trading. 331,000 calls and 140,000 puts traded on the ETF Wednesday. Today, shares gained 18 cents to $37.41 on another good day for the metal. Silver added 32 cents to $38.47 and has now rallied 8.2 percent over the past three days. Meanwhile, in SLV options action, 376,000 calls and 137,000 puts traded on the fund. July 38 calls, which are 59 cents out-of-the-money with one day of life remaining, were the most actives. Volume approached 80,000. July 37 and 39 calls saw heavy trading as well, as did July 37 and 38 puts in the SLV.